Hexagon AB (publ)

Good morning. Thank you very much for attending the call. We are pleased to report a strong third quarter with organic growth of 8%, very solid back to back across most divisions. Innovation has been a key driver for us in Q3. We see progress with the investments in cloud platforms, good adoption for autonomy solutions, automated inspection, newly launched product having good reception from customers, very differentiated reality capture technologies growing very solidly in double digits. All of this gives us a good competitive momentum in most areas. And of course, innovation is also helping us offset the macro weakness that we see in some of the verticals and the regions that we are exposed to. Gross margin came in resilient at 65%. Operating margin at 29%, but net of effects, we saw incremental volumes coming in at very good marginal profitability, as we will see later. Also, thanks to the initial savings from the rationalization program that we just launched, we managed to trigger more than $40 million in annualized savings. I'll give you a little more detail on this a few slides later. Cash from operations grew in line with revenue. while cash conversion was negatively impacted by working capital, an impact that will reverse. In the quarter, we announced the acquisition of Hardline, Canadian-based, the provider of technology solutions for remote control, roughly 12 million in sales, strengthening our portfolio for the mining industries. In slide five, we give you more detail about the breakdown of growth as it came in through the reporting segments and the divisions. The start of the show in Q3 was certainly on the right-hand side, autonomy and positioning growing at 41%, driven by defense, by agriculture, by autonomy and ADAS solutions in automotive. Geosystems grew at six, very solidly considering the macro environment when it comes to construction and infrastructure. The SIG division declined by 5 percentage points as we keep redefining the perimeter of our core business in SIG and keep it as much as possible focused on software and recurring revenue rather than unrelated and dilutive services. In IES, manufacturing intelligence grew by 8 percentage points, a continuation of the good momentum that we've seen this year, and ALI grew by 10 percentage points, both in the core design areas as well as in asset management. If we're moving on to slide six, an update on the rationalization program that we just launched. In summary, three months ago, we announced an investment of 198.6 million, which we fully recognize in our Q3 P&L to support the creation of 160 to 170 million of annualized savings fully realized by 2025. A quick reminder of what are we addressing with this investment is about G&A synergies across the divisions. It's about optimizing the real estate footprint of the group, tackling some of the areas of underperformance that we have within our operations, as well as making one-off investments in automation, digital and physical automation that are going to create cost savings across the group. In Q3, the program had a cash impact of $16 million and triggered, as I said before, roughly $45 million of annualized savings. $6 million of savings were realized in Q3. In the quarter, we have also completed a small disposal within the SIG division, realizing a small gain, as we keep looking at opportunities for rationalization and better capital allocation.

Ben? Yeah, thanks, Paolo. Good morning. So on to the breakdown of organic growth by region and industry. We saw growth in every region, which is good, but a similar trend to last quarter, a slower development in North America and Western Europe, with most segments growing but at low single-digit rates and declines in some construction markets. China still grew organically in the quarter at 6%, a little bit slower than Q2. What we see there is still weakness in construction markets, slightly slower demand than previously in automotive, but general industry and electronics still strong. Elsewhere, we still see good growth in the Middle East and rest of Asia, especially markets like India, South Korea, and Indonesia. By segment surveying, we see a weaker trend in North America and Western Europe, but this is being offset at the moment by very good growth in the reality capture solutions, including the BLK lines. Power, energy, and mining, still very good momentum across the board. In discrete manufacturing, we see good growth globally in aerospace and defense, a solid development in electronics and general manufacturing. But as I said, we're seeing some slowdown in automotive markets after a very strong last few years. Next slide, please. In terms of geospatial enterprise solutions, they delivered sales of 666 million euros during the quarter. So that's organic growth of 7% and an operating margin of 30.6, which is slightly down on last year. As David will come on to show, the underlying incremental margin was very good, but currency was a drag on the margin. If you look at it by subdivision, Geosystems continues to gradually slow. We're seeing very good growth in mining and reality capture solutions offset the slowdown we see in surveying and construction products. Machine control, which is construction-focused, was fairly stable overall. For Geosystems overall, new products, so those products that we launched in the last 12 months, including the BLK360 Generation 2, that added around 3% to Geosystems' growth overall, so showing the payback we're getting on the investments. SIG, as Paolo mentioned, continues to have the drag from the exit of low margin defense contracts. We expect a similar development in Q4, and then we'd expect growth to resume as we start to lap easier comparatives. Public safety was flat in the quarter, but has very good order momentum, and they are building a good pipeline for next year. A&P, an exceptional quarter with 41% organic growth. this included a one-off perpetual deal which accounted for around 25 points of the growth so i would say it's probably mid-teens underlying i still see very good underlying trends in their core markets agriculture aerospace and defense and marine and we expect that to carry into the final quarter of the year next slide please in terms of industrial enterprise solutions they had sales of 686 million euros so that's organic growth of nine percent In terms of the margin of 28.7%, again, the negative drag on that was currency. By division, if you look at manufacturing intelligence, they did 8% organic growth. Good growth in aerospace and manufacturing, continued momentum in China, but automotive markets slowing. Order growth for MI during the quarter was slightly slower than revenues, was running at a mid-single-digit growth rate. For ALI, 10% organic growth, a very good performance overall across industries and products. We continue to see a slow improvement in processed industries, including oil and gas, and the benefits of the diversification efforts we've pushed as a strategy in that division for the last few years, with them having nice wins in both mining and pulp and paper segments. The quarter did benefit from a couple of large perpetual deals, which probably added a couple of percent to the growth rate, but we see good momentum in this business overall. And for IES, both EAM and ETQ had a good quarter, both growing at double-digit rates with faster growth than that in the SaaS segments. Over to you, David.

Thanks, Ben. So I'll just start with a brief summary of the elements that I would like to cover over the next five slides. That's an outline of the strong operational performance in the quarter, explaining how our diverse geographical footprints introduced some material currency movements from the comparative perspective, and finally to expand on the cash flow in the quarter. So just walking through the income statement, we reported 1,352,000,000 operating net sales, which was a reported growth of 2%, had currency impact of 7%, 2% from structure, which was an organic therefore of 8%. The adjusted gross margin was 65.5, up 0.3 from the previous year. We delivered an EBIT of 393 million, which was an EBIT margin percentage of 29.1, again, up 2% as in line with the reported sale. The earnings before taxes were 350 million, with the impact of the interest expense of 43 versus the prior year of nine. And the other line to highlight is the adjustment line, which was 246.2 million, which includes the one-time charge of 198.6, the usual PPA amortization of 29, and the LTIP of 16. Moving on to the next slide, just to reiterate the strength of the margin performance, we have 65.5 to 65.2, as I mentioned. But this long-term graph shows that this is one of the underlying cornerstones of Hexagon's improved EBIT over a long time horizon, driven by a richer software mix and the improved margins through next generation products and devices and launch. And on a rolling basis, this was increased by 1% from 65 to 66. Moving to the next slide, we have the profitability bridge. So here I introduce again the significant currency impact. So on the top line, we had an 87 million currency impact on translation, which was driven by the devaluation of the CMY and the Japanese yen by 12% and the US dollar of 7%. That poured through with it a 34 million translation impact on EBIT level. That was a significant dilution to group margin because our sales footprint in the US and in China exceed our cost footprint. So devaluation in that currency is a drag. And we also saw a small appreciation in the Swiss franc where we have the opposite. And that again added to the drag that we saw. In addition to the translation, we have a net transaction impact of seven on top of the 34 to take us to 41, which was 9.7 in the prior year and 2.9 in the current year. So all in all, the currency impact is a drag of 47%. or 1.1 on an accretion dilution perspective. Moving on to the next column, which is structure. That is the acquisitions that have been in the group for less than 12 months. We had a contribution in net sales of 20 million, an operating adjustment of six, sorry, an operating earnings of six, and therefore a 30% margin, so just above the group's prior year, so adding a small amount on the accretive level. The result from that is the organic. That's the difference between those elements. And there you see that the delivered profit was 42 million. That's a 42% drop through on profitability. This is where the savings from the rationalization program would be reflected. And that would be an accretive of 0.9. So the overall conclusion of this is that without the FX impact, we would have seen a 1% improvement in the operating margin for the group. Moving on to the next slide, this is a cash flow analysis. Just wanted to start on the top line is the EBIT that we've already seen reported with the 2% growth. It's there for reference for the calculation of the cash conversion. The next line is the cash flow from operations before change in working capital excluding taxes, which is $489 million. That's a 6% increase. So the increase on the cash flow line at that level exceeding the operating earnings, showing that we're actually leveraging. That's caused by an increase in the outback from the depreciation and amortization. The investment level was constant year over year at $141 million. So cash flow post investments increases to 8%. We could have introduced currency also in this slide, but to keep it simple, we didn't. But it would have had a material impact if you consider currency drag on these numbers. The dilution on the cash conversion comes from the next number, which is the change in working capital, where we saw a challenging 98 million absorption from that element, and that is the element that has reduced the cash conversion down to 64. I'll come back to that on the next slide just to give some context around that 98. Slowing down through the rest of the cash flow statement, we have taxes paid of 61, which changes based on timing. and the difference between estimated tax payments and actual tax payments. And as I mentioned on the first slide, we see that the high interest cost is diluting, which brings us down to the bottom of the cash flow statement. Moving on to the next slide, we have the working capital to sales trend. This is a long time horizon. We see a very good development on the long-term working capital to roll in 12-month sales, decreasing downwards. That's as we improve the software mix through acquisition. You see the point where the 10% line dissects the curve. That is the point where we went into the COVID impact And you see at that point a significant reduction in the working capital as we had an impact on the hardware, more material to the more resilient software business that didn't decline as much. The ratio then slowly climbs back as we move into a more normalized range. And this was a protracted process as we were navigating the component sourcing issues, which are now largely resolved. but it has caused that slow take back to the existing level. So now we feel that we're moved back to a more normalized element driven by the strong growth that we've seen over that time horizon. In the top right-hand box, just to give some breakdown, I split the 98 million change in working capital. So that was an increase in receivables of 35 million. We had a very strong closeout to the quarter. We saw some large perpetual deals, especially in the ALI division, which meant that billings were up 12 million in September. I don't have any concerns on the DSO side or on the receivable side. They sit there at around the 84, which is in line with our average. We saw a small decrease in inventory. which I would have actually probably hoped would have been a little bit stronger. We're not trying to destock or anything like that, but I think we've reached the level of industry of inventory that we should be able to operate with. And that has a consequence through on the liabilities line, because we're actually slowing down the inventory purchasing. We see a reduction on the payable side, obviously DPOs turn faster than DII's and therefore we see that impact before we see it into inventory. The movement on deferred revenue is the normal phasing we would have expected to see between Q2 and Q3, and the accrued expenses likewise. So just to conclude, the summary was a strong delivery quarter backed by the continued organic growth, improved operational performance in both EBIT and the cash from an operating perspective, masked by the FX, and a cyclical tie-up in working capital.